WASHINGTON/TOKYO (Reuters)

U.S. President Joe Biden officially blocked Nippon Steel’s proposed $14.9 billion purchase of U.S. Steel on Friday, citing national security concerns, in a move that dealt a probably fatal blow to the contentious merger plan after a year of review.

“A strong domestically owned and operated steel industry represents an essential national security priority and is critical for resilient supply chains,” Biden said in a statement. “Without domestic steel production and domestic steelworkers, our nation is less strong and less secure.”

The deal was announced in December 2023 and almost immediately ran into political opposition ahead of the Nov. 5 U.S. presidential election. Both then-candidate Donald Trump and Biden vowed to block the purchase of the storied American firm, the first-ever corporation valued at more than $1 billion and which once controlled most of the country’s steel output.

Nippon paid a hefty premium to clinch the deal and made several concessions, including a last-ditch gambit to give the U.S. government veto power over changes to output. The Pittsburgh-based company has warned that thousands of jobs would be at risk without the deal. Analysts say another buyer could emerge, with suitors including Ohio-based Cleveland-Cliffs.

The Committee on Foreign Investment in the United States (CFIUS) spent months reviewing the deal for national security risks but referred the decision to Biden in December, after failing to reach consensus.

Nippon Steel has previously threatened legal action if the deal was blocked.

Shares of U.S. Steel were down 7% to $30.32 in early trading on the New York Stock Exchange.

Key Asia ally

In a November letter, Japanese Prime Minister Shigeru Ishiba urged Biden to approve the merger so as to avoid marring recent efforts to strengthen ties between the two countries, Reuters has exclusively reported.

A spokesperson for Ishiba could not be reached for comment on Friday before the announcement and Japan’s trade ministry declined to comment ahead of the formal announcement of a decision.

United Steelworkers President David McCall praised Biden’s decision, saying the union has “no doubt that it’s the right move for our members and our national security.”

Japan is a key U.S. ally in the Indo-Pacific region, where China’s economic and military rise and threats from North Korea have raised concerns in Washington.

It is also the top investor in the U.S. and Keidanren, its biggest business lobby, has previously aired concerns that the review was facing political pressure.

Blocking the deal may dissuade international investors from bidding for politically sensitive U.S. companies with a unionized workforce in the short term, said Alistair Ramsay, vice president of steel research at consultancy Rystad Energy.

“Big bids are a risky idea less than 12 months from a presidential election, but big steel producers with traditional operating furnaces, such as Nippon Steel, see the U.S. as an excellent place to produce steel in the long term, despite the market depression there,” he added.

Lawyers including Nick Wall, M&A partner at Allen & Overy, have said Nippon’s vow to mount a legal challenge against the U.S. government would be tough.

The two companies had sought to assuage concerns over the merger. Nippon offered to move its U.S. headquarters to Pittsburgh, where the U.S. steelmaker is based, and promised to honour all agreements in place between U.S. Steel and the USW.

A source familiar with the matter said this week that Nippon Steel had also proposed giving the U.S. government veto power over any potential cuts to U.S. Steel’s production capacity, as part of its efforts to secure Biden’s approval.

“It is difficult to fully understand the risks involved in Nippon Steel’s potential acquisition of U.S. Steel,” said a Japanese government official, who spoke on condition of anonymity, as did the other sources.

“Nippon Steel has done everything to eliminate risks related to economic securities, including committing not to reduce production.”

Nippon Steel faces a $565 million penalty payment to U.S. Steel following the deal’s collapse, which is set to prompt a major rethink of its overseas-focused growth strategy.

With the acquisition of U.S. Steel, Nippon Steel aimed to raise its global output capacity to 85 million metric tons a year from the current 65 million, nearing its long-term goal of taking capacity to 100 million tons.

Atilla Widnell, managing director at Singapore-based trade consultancy Navigate Commodities, said any decision to block the deal was “misguided.”

“Nippon Steel is a bona fide operator of overseas assets with a strong and successful track record,” Widnell said.

“Even more so, U.S. Steel has acknowledged its assets are in dire need of new large-scale investment and it will not be able to sustain its operational capacity and production in its current state.”

Democrats in Congress also praised Biden’s decision. Ohio Senator Sherrod Brown said the deal “represented a clear threat to America’s national and economic security and our ability to enforce our trade laws. It’s why we fought it every step of the way.”

U.S. Representative Debbie Dingell, who represents a district in Michigan, said “it is critical to our economic security and national security that we keep our steel manufacturing ability and jobs strong here in America.”